Private corporate debt is the most commonly held alternative income asset class among insurers and pension funds according to an Aviva Investors survey, with over 57 percent of insurers and 55 percent of pension funds having an exposure to the asset class.
Moreover, the survey found that 42 percent of insurers and 26 percent of pension funds intend to increase their allocations to the asset class over the next 12 months.
Almost a third of insurers (31 percent) said they plan to increase their exposure to infrastructure debt over the next three years – which Aviva thinks may be due to more favourable capital treatment under Solvency II.
The study, which canvassed more than 250 pension schemes and insurers in the UK and the rest of Europe, found UK pension funds are plotting the biggest increase in allocations to alternative income – as their exposure currently lags behind insurers in the UK and pension funds and insurers in continental Europe.
These UK pension funds are looking to increase their allocation by 51 percent from 4.3 percent of the total to 6.5 percent, while UK insurers want to increase by 14 percent from 7.3 percent to 8.3 percent. In continental Europe, insurers are planning to ramp up their alternative income exposure from 6.5 percent to 9.2 percent and pension funds from 5.2 percent to 7.3 percent.
Respondents to the survey said their desire to boost allocations was driven primarily by the downside protection alternative assets can offer (34 percent), followed by diversification benefits (33 percent) and illiquidity premia (30 percent).
Barriers to investment were said to include illiquidity (31 percent), the high cost of investing (29 percent), difficulty finding suitable opportunities (27 percent) and regulation (also 27 percent).
Most investors believed that the best opportunities were to be found outside their home markets. “As the era of quantitative easing finally winds down and interest rates rise, the survey highlights that investors are venturing into new sectors and geographies,” said Mark Versey, chief investment officer of real assets at Aviva Investors.